OECD - Base Erosion and Profit Shifting project · Page 8 Specific BEPS target areas OECD’s 19...

OECD - Base Erosion and ProfitShifting project

18 July 2014

Presenter

Kannan RamanDirector – International Tax Services, Ernst & Young UK (India branch office)India Direct: +91 44 6654 8702India Mobile: +91 98407 88025Email: [email protected]

Background on OECD BEPS project

TP documentation and CbC reporting

OECD BEPS project

Work on OECD BEPS project began in 2012► Project is being driven by governments of several key OECD member countries,

including UK, US, Germany, France, and Australia► Project had its origins in discussions in G20 and also is endorsed by G8

OECD report “Addressing Base Erosion and Profit Shifting” was releasedon 12 February 2013

► Report was issued in connection with G20 Finance Ministers meeting on 15-16February 2013

► Report sets stage for substantive work by OECD in wide range of areas

OECD BEPS project is closely linked to international tax reformdiscussions in individual countries

► Focuses on same issues that are subject of hearings and headlines in manycountries around world

► High-level government interest in project means that work is being done on anaccelerated time table and recommendations that come out of it likely will havestrong endorsement of many OECD member countries

G20 and G8 on OECD BEPS report

Communiqué from G20 Finance Ministers meeting on 15-16 February2013:

“In the tax area, we welcome the OECD report on addressing baseerosion and profit shifting and acknowledge that an important part of fiscalsustainability is securing our revenue bases. We are determined todevelop measures to address base erosion and profit shifting, takenecessary collective actions and look forward to the comprehensive actionplan the OECD will present to us in July.”

Statement from UK Chancellor Osborne at G20 meeting (UK hadpresidency of G8 in 2013):

“This is an international issue that requires international action. Theglobal economy has changed massively over the last decade, but globaltax rules have stood still for almost a century, and Britain will lead theinternational effort to bring them into the twenty first century.”

Overview of OECD BEPS project► OECD’s Action Plan on Addressing Base Erosion and Profit Shifting (BEPS) is aimed at

government concern about potential for multinational companies (MNCs) to reducetheir tax liabilities through shifting of income to no- or low-tax countries

► Driven by MNC tax issues that have been in the headlines around the world

► G8 and G20 governments have endorsed OECD’s work on BEPS and havecommitted to individual country action

► Major developing (non-OECD) countries, including China and India, are activelyparticipating in BEPS project

► Responsive changes over the next several years will differ across countries inspecifics and in timing, reflecting each country’s particular circumstances

► Companies need to be ready for BEPS-related developments in all countries wherethey have operations, investment or activity

► OECD BEPS agenda is ambitious in both scope and timing, the issues arecomplex, but there is a real sense of political imperative

► The strongest political imperative and sense of urgency is around increasedtransparency


BEPS action plan – changes to theinternational tax landscape

► Action 6: Prevent treaty abuse► Action 7: Prevent the artificial avoidance of permanent

establishment status► Action 8: Consider transfer pricing for intangibles► Action 9: Consider transfer pricing for risks and capital► Action 10: Consider transfer pricing for other high-risk

transactions

► Action 15: Development of amultilateral instrument for amendingbilateral treaties

► Action 11: Establishmethodologies to collect andanalyse data on BEPS andactions addressing it

► Action 12: require taxpayersto disclose their aggressivetax planning arrangements

► Action 13: Re-examinetransfer pricingdocumentation

► Action 14: Making disputeresolutions more effective

► Action 2: Neutralise theeffects of hybrid mismatcharrangements

► Action 3: Strengthen CFCrules

► Action 4: Limit base erosionvia interest deductions andother financial payments

► Action 5: Counter harmful taxpractices more effectively,taking into accounttransparency and substance

► Action 1 : Address the tax challengesof the digital economy

Action planon Base

Erosion andProfit

Shifting(BEPS)

Specific BEPS target areas

OECD’s 19 July 2013 report set forth its work plans in 15 target areas:

1) Tax challenges of the digital economy –Sept 2014

2) Hybrid mismatch arrangements – Sept2014

3) CFC rules – Sept 2015

4) Deductibility of interest and other financialpayments – Sept /Dec 2015

5) Harmful tax practices of countries – Sept2014/Sept 2015/Dec 2015

6) Treaty abuse – Sept 2014

7) Artificial avoidance of permanentestablishment status – Sept 2015

8) Transfer pricing for intangibles – Sept2014/2015

9) Transfer pricing for risks and capital – Sept2015

10) Transfer pricing for other high-risk transactions– Sept 2015

11) Development of data on BEPS and actionsaddressing it – Sept 2015

12) Disclosure of aggressive tax planningarrangements – Sept 2015

13) Transfer pricing documentation – Sept 2014

14) Effectiveness of treaty dispute resolutionmechanisms – Sept 2015

15) Development of a multilateral instrument foramending bilateral tax treaties – Sept 2014/Dec2015


OECD consultation process (so far)


Action 13 - TP documentation (and CbCreporting)


Why focus on increased reporting now?

► Increased access to information is the primary political imperative of theBEPS project

► Increased reporting not directly about dividing taxing jurisdiction, soconsensus in OECD and countries will be easier to reach

► Increased reporting seeks to address what many tax authorities see as a highpriority corporate tax issue and key audit focus (transfer pricing and PE risk)

► Adoption and enforcement of increased reporting requirements by countrydoes not necessarily require changes in legislation or regulation

► OECD will issue a template for country by country reporting in September2014, which many countries are expected to implement


► Increased reporting is highest priority for OECD and many other countries

► Increased documentation is intended to provide information for tax authoritiesto gain transparency regarding a MNC’s global operations as a whole

► OECD also suggests that harmonizing transfer pricing documentationapproaches will reduce compliance burdens for MNCs

► Discussion Draft reflects a tiered approach focused on both global (MasterFile) and local attributes (Local File)

► Discussion Draft includes template for country-by-country (CbC) reportingintended for high-level risk assessment purposes and relevant to all 15 BEPSActions

OECD Discussion Draft on Transfer PricingDocumentation and Country-by-Country Reporting(released 30 January 2014)


Global information – Master file

► Global information is aimed at providing a clear understanding of MNC’sentire operations

► OECD asserts current documentation practice typically does not provide “bigpicture” available for risk assessment purposes

► Particular focus on features that may indicate significant transfer pricing risk► Significant transactions with a low tax jurisdiction► Transfers of intangible property to related parties► Business restructurings► Specific types of related party payments► Year on year loss making► Poor or non-existent documentation► Excessive debt

► CbC reporting template included as part of master file► Master file likely to be required to be prepared contemporaneously with tax

return (although CbC reporting template may be permitted to be filed with aone-year lag)


Summary of OECD recommended Master filecontent► Organizational structure

► Chart of legal and ownership structure and location ofoperating entities

► Descriptions of MNC’s major businesslines

► List of profit drivers

► Chart of supply chain► Chart of non-R&D intercompany service arrangements► Description of main geographic markets

► Functional analysis describing value contributions byindividual entities

► Description of restructuring, acquisitions, and divestituresduring the relevant year

► List of 25 most highly compensated employees with title andlocation

► MNC’s intangibles► Description of strategy for development, ownership and

exploitation of IP including location of R&D facilities andmanagement

► List of material intangibles and ownership► List of related party arrangements related to IP

► MNC’s intangibles (cont’d)► Description of group TP policy related to R&D and IP

► Description of internal transfers of interests in IP during therelevant year (entities, location and compensation)

► MNC’s intercompany financial activities► Description of group financing, including important

arrangements with unrelated lenders

► Identification of central financing entities and their place oforganization and operation

► Description of TP policies for intercompany financingarrangements

► MNC’s financial and tax positions► MNC’s annual consolidated financial statement

► List and description of MNC group’s applicable APAs► List and description of other relevant tax rulings related to

the allocation of income to particular jurisdictions► List and description of transfer pricing matters pending

under treaty MAP processes or resolved in MAP during thelast two years

► Country by country reporting template


Key content differences between typical currentstate and OECD proposed documentation

Proposed OECD master file content

► Global scope► Industry and business overview dependent on

analyst reports and annual statements► Coverage of majority of transactions required► Materiality to be considered► Overall view provided through global supply

chain chart and CbC reporting template► Required to list transactions related to

intangibles, intercompany loans, businessrestructurings

► Description of transfer pricing policy andfinancial systems used to implement policyrequired

► List of all APAs (unilateral or bilateral)► List of tax rulings► Global Legal Entity Chart

Typical current documentation content

► Regional or transactional scope► Industry and business overview tailored to

transaction including some public and privateinformation

► Does not necessarily cover all or majority oftransactions or consider materiality

► Global profit analysis and global supply chainchart not typically provided

► Transactions related to intercompany loans,intangibles, business restructurings, lossentities and low-tax jurisdictions only coveredin relevant country documentation

► Description of company’s financial systemsand transfer pricing policy typically not included

► APAs not listed unless relevant to coveredtransaction in country documentation

► Tax rulings not typically listed or described


Country-specific information – Local files

► Local files are aimed at providing local country transactionalinformation

► Detailed information to determine whether a specific transaction is atarm’s length

► Robust functional analysis by transaction

► Method selection

► Comparables analysis

► Relevant financial data for local entities also included in local files


Summary of OECD recommended local filecontent► Local entity

► Local organization chart and description of managementstructure, individuals and country location of individuals towhom local management reports

► Indication whether the local entity has been involved oraffected by business restructurings or intangible transfers inthe present or past year, including explanation of suchtransactions affect on the local entity

► Material category of controlledtransactions:

► Description of the transaction (e.g., manufacture, distributionof goods, etc.) and context in which it takes place (e.g.,business activity, financial activities of the MNC group, costcontribution arrangement)

► Aggregate amount of intercompany charges► Identification of associated parties involved in each

controlled transactions, and relationship amongst them

► Detailed functional analysis with respect to each controlledtransaction (i.e., functions performed, assets used and risksborne)

► Other relevant related party transactions► Selection of most appropriate TP method and reasons for

selection, as well as selection of the tested party

► Controlled transactions (cont’d)► Important assumptions made in applying the TP

methodology, explanation for performing multi-year analysis(if relevant)

► Description of selected comparable uncontrolledtransactions, comparable search methodology and sources

► Description of any comparability adjustments performed► Description of the reasons for concluding that relevant

transactions were conducted on an arm’s length basisbased on the application of the selected method

► Summary of financial information used to apply the TPmethodology

► Financial information► Annual local entity financial accounts for the relevant year

► Information and allocation schedules showing how thefinancial data used in apply the transfer pricing method maybe tied to the annual financial statements

► Summary schedules and sources of relevant comparablefinancial data


CbC reporting template

► Reporting for each entity separately entities aggregated by country► Branches treated as separate entities in country of operation► Information required in proposed template:

► Place of effective management

► Important business activity codes

► Revenues

► Earnings before income tax

► Income tax paid on cash basis to country of organization

► Income tax paid on cash basis to all other countries

► Withholding tax paid

► Cash taxes paid

► Current tax accrual

► Stated capital and accumulated earnings

► Number of employees and total employee expense

► Tangible assets (other than cash and cash equivalents)

► Royalties, interest, and service fees paid to and received from related entities (6 columns)


OECD draft template (expected to change)


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Country reactions to CbCR

Trends in countries surveyed by EY:

► Most surveyed countries support the CBCR approach suggested by the OECD andwill comply with any action taken to that effect.

► Among the surveyed countries, Denmark, France, Spain, Canada and Australiaalready have provisions or draft legislation dealing with CBCR.

► An update to the OECD Guidelines on the content of the Master file ascontemplated in the discussion draft on CBCR (which requires reporting on a non-legal entity basis) would require changes in law in most countries to make itenforceable on taxpayers.

► From a confidentiality perspective, most countries protect the confidentiality of taxinformation obtained by tax authorities.

UK reaction to CBCR

As part of the Budget 2014 announcements, the UK Government published a positionpaper which explains why the UK considers the current international tax framework isnot fit for purpose, and sets out the UK's priorities for the OECD's Base Erosion andProfit Shifting (BEPS) project.

With regard to CBCR , the paper highlights the role played by the UK in initiating theproposal for a country-by-country reporting template. The Government believes thatthis important initiative will enhance transparency between business and taxauthorities, including those of developing countries, by providing tax authorities withhigh-level information to help them efficiently identify and assess risks.

Populating the CBCR template

Entity-Specific Information Tax Information Intercompany Transaction Information

Country ConstitutentEntity

Country +Constituent

Entity

Place ofEffective

MgmtPrimary Function Revenue

EarningsBeforeIncome

Taxes (EBT)

StatedCapital and

Accum.Earnings

HeadcountTotal

EmployeeExpense

TangibleAssets other

than Cashand Cash

Equivalents

Cash TaxPaid -

Country ofOrganization

Cash TaxPaid - All

OtherCountries

TotalWithholding

Tax Paid

Total TaxesPaid

RoyaltiesPaid

RoyaltiesReceived Interest Paid Interest

ReceivedServices

Fees Paid

ServicesFees

Received

Net I/CTransaction

Amount

A LE1 A - LE1 Sales andDistribution $1,250.00 $31.25 $31.25 $27.00 $2.00 $526.00 $2.11 $0.53 $1.05 $3.69 $1.0 $3.0 $2.0 $2.0 $3.0 $3.0 $2.0

B LE1 B - LE1 R&D $2,000.00 $40.91 $40.91 $35.00 $2.00 $145.00 $2.76 $0.69 $1.38 $4.83 $3.0 $3.0 $4.0 $5.0 $4.0 $3.0 $0.0

C LE1 C - LE1 Finance $1,000.00 $5.00 $5.00 $17.00 $2.00 $410.00 $0.45 $0.11 $0.23 $0.79 $0.0 $5.0 $2.0 $4.0 $2.0 $4.0 $9.0

D LE1 D - LE1 Other $500.00 $150.00 $150.00 $9.00 $2.00 $477.00 $20.25 $5.06 $10.13 $35.44 $5.0 $1.0 $3.0 $1.0 $0.0 $0.0 -$6.0

E LE1 E - LE1Holding

IntellectualProperty

$300.00 $62.50 $62.50 $6.00 $2.00 $654.00 $5.63 $1.41 $2.81 $9.84 $0.0 $4.0 $1.0 $5.0 $1.0 $4.0 $11.0

F LE1 F - LE1 Manufacturingand Production $1,800.00 $40.50 $40.50 $12.00 $2.00 $195.00 $4.56 $1.14 $2.28 $7.97 $0.0 $1.0 $1.0 $4.0 $1.0 $5.0 $8.0

G LE1 G - LE1Administrative

and SupportService

$950.00 $10.00 $10.00 $21.00 $2.00 $92.00 $0.90 $0.23 $0.45 $1.58 $3.0 $1.0 $4.0 $5.0 $1.0 $3.0 $1.0

H LE1 H - LE1 Sales andDistribution $2,150.00 $55.29 $55.29 $14.00 $2.00 $593.00 $7.46 $1.87 $3.73 $13.06 $2.0 $3.0 $1.0 $4.0 $5.0 $2.0 $1.0

I LE1 I - LE1 Manufacturingand Production $1,350.00 $115.71 $115.71 $23.00 $2.00 $416.00 $15.62 $3.91 $7.81 $27.34 $0.0 $2.0 $0.0 $0.0 $3.0 $0.0 -$1.0

J LE2 J - LE2 Manufacturingand Production $800.00 $78.22 $78.22 $16.00 $2.00 $352.00 $5.00 $1.25 $1.00 $7.25 $2.0 $2.0 $3.0 $5.0 $0.0 $1.0 $3.0

K LE2 K - LE2 Insurance $1,775.00 $63.11 $63.11 $24.00 $2.00 $664.00 $5.00 $1.25 $1.00 $7.25 $5.0 $1.0 $0.0 $5.0 $1.0 $2.0 $2.0

L LE2 L - LE2 R&D $2,225.00 $75.00 $75.00 $30.00 $2.00 $372.00 $5.00 $1.25 $1.00 $7.25 $0.0 $5.0 $3.0 $0.0 $2.0 $5.0 $5.0

C LE2 C - LE2 Insurance $1,000.00 $5.00 $5.00 $17.00 $2.00 $410.00 $0.45 $0.11 $0.23 $0.79 $0.0 $5.0 $2.0 $4.0 $2.0 $4.0 $9.0

Country Constitutent Entity Country + ConstituentEntity

Place of EffectiveMgmt Primary Function

A LE1 A - LE1 Sales and Distribution

B LE1 B - LE1 R&D

C LE1 C - LE1 Finance

D LE1 D - LE1 Other

► Information about the entity and place of effectivemanagement …

► Accounting and financial data …





Entity

Place ofEffective



Taxes (EBT)

StatedCapital and

Accum.Earnings

HeadcountTotal

EmployeeExpense


than Cashand Cash

Equivalents

Cash TaxPaid -


Cash TaxPaid - All

OtherCountries

TotalWithholding

Tax Paid

Total TaxesPaid

RoyaltiesPaid


ReceivedServices

Fees Paid

ServicesFees

Received

Net I/CTransaction

Amount


B LE1 B - LE1 R&D $2,000.00 $40.91 $40.91 $35.00 $2.00 $145.00 $2.76 $0.69 $1.38 $4.83 $3.0 $3.0 $4.0 $5.0 $4.0 $3.0 $0.0

C LE1 C - LE1 Finance $1,000.00 $5.00 $5.00 $17.00 $2.00 $410.00 $0.45 $0.11 $0.23 $0.79 $0.0 $5.0 $2.0 $4.0 $2.0 $4.0 $9.0

D LE1 D - LE1 Other $500.00 $150.00 $150.00 $9.00 $2.00 $477.00 $20.25 $5.06 $10.13 $35.44 $5.0 $1.0 $3.0 $1.0 $0.0 $0.0 -$6.0



$300.00 $62.50 $62.50 $6.00 $2.00 $654.00 $5.63 $1.41 $2.81 $9.84 $0.0 $4.0 $1.0 $5.0 $1.0 $4.0 $11.0



and SupportService

$950.00 $10.00 $10.00 $21.00 $2.00 $92.00 $0.90 $0.23 $0.45 $1.58 $3.0 $1.0 $4.0 $5.0 $1.0 $3.0 $1.0





L LE2 L - LE2 R&D $2,225.00 $75.00 $75.00 $30.00 $2.00 $372.00 $5.00 $1.25 $1.00 $7.25 $0.0 $5.0 $3.0 $0.0 $2.0 $5.0 $5.0


RevenueEarnings BeforeIncome Taxes

(EBT)

Stated Capital andAccum. Earnings Headcount Total Employee

Expense

Tangible Assetsother than Cash

and CashEquivalents

$1,250.00 $31.25 $31.25 $27.00 $2.00 $526.00

$2,000.00 $40.91 $40.91 $35.00 $2.00 $145.00

$1,000.00 $5.00 $5.00 $17.00 $2.00 $410.00

$500.00 $150.00 $150.00 $9.00 $2.00 $477.00

► Details of cash taxes paid in the year …





Entity

Place ofEffective



Taxes (EBT)

StatedCapital and

Accum.Earnings

HeadcountTotal

EmployeeExpense


than Cashand Cash

Equivalents

Cash TaxPaid -


Cash TaxPaid - All

OtherCountries

TotalWithholding

Tax Paid

Total TaxesPaid

RoyaltiesPaid


ReceivedServices

Fees Paid

ServicesFees

Received

Net I/CTransaction

Amount


B LE1 B - LE1 R&D $2,000.00 $40.91 $40.91 $35.00 $2.00 $145.00 $2.76 $0.69 $1.38 $4.83 $3.0 $3.0 $4.0 $5.0 $4.0 $3.0 $0.0

C LE1 C - LE1 Finance $1,000.00 $5.00 $5.00 $17.00 $2.00 $410.00 $0.45 $0.11 $0.23 $0.79 $0.0 $5.0 $2.0 $4.0 $2.0 $4.0 $9.0

D LE1 D - LE1 Other $500.00 $150.00 $150.00 $9.00 $2.00 $477.00 $20.25 $5.06 $10.13 $35.44 $5.0 $1.0 $3.0 $1.0 $0.0 $0.0 -$6.0



$300.00 $62.50 $62.50 $6.00 $2.00 $654.00 $5.63 $1.41 $2.81 $9.84 $0.0 $4.0 $1.0 $5.0 $1.0 $4.0 $11.0



and SupportService

$950.00 $10.00 $10.00 $21.00 $2.00 $92.00 $0.90 $0.23 $0.45 $1.58 $3.0 $1.0 $4.0 $5.0 $1.0 $3.0 $1.0





L LE2 L - LE2 R&D $2,225.00 $75.00 $75.00 $30.00 $2.00 $372.00 $5.00 $1.25 $1.00 $7.25 $0.0 $5.0 $3.0 $0.0 $2.0 $5.0 $5.0


Cash Tax Paid -Country of

Organization

Cash Tax Paid - AllOther Countries

Total WithholdingTax Paid Total Taxes Paid

$2.11 $0.53 $1.05 $3.69

$2.76 $0.69 $1.38 $4.83

$0.45 $0.11 $0.23 $0.79

► … and details of certain intragroup transactions




Entity

Place ofEffective



Taxes (EBT)

StatedCapital and

Accum.Earnings

HeadcountTotal

EmployeeExpense


than Cashand Cash

Equivalents

Cash TaxPaid -


Cash TaxPaid - All

OtherCountries

TotalWithholding

Tax Paid

Total TaxesPaid

RoyaltiesPaid


ReceivedServices

Fees Paid

ServicesFees

Received

Net I/CTransaction

Amount


B LE1 B - LE1 R&D $2,000.00 $40.91 $40.91 $35.00 $2.00 $145.00 $2.76 $0.69 $1.38 $4.83 $3.0 $3.0 $4.0 $5.0 $4.0 $3.0 $0.0

C LE1 C - LE1 Finance $1,000.00 $5.00 $5.00 $17.00 $2.00 $410.00 $0.45 $0.11 $0.23 $0.79 $0.0 $5.0 $2.0 $4.0 $2.0 $4.0 $9.0

D LE1 D - LE1 Other $500.00 $150.00 $150.00 $9.00 $2.00 $477.00 $20.25 $5.06 $10.13 $35.44 $5.0 $1.0 $3.0 $1.0 $0.0 $0.0 -$6.0



$300.00 $62.50 $62.50 $6.00 $2.00 $654.00 $5.63 $1.41 $2.81 $9.84 $0.0 $4.0 $1.0 $5.0 $1.0 $4.0 $11.0



and SupportService

$950.00 $10.00 $10.00 $21.00 $2.00 $92.00 $0.90 $0.23 $0.45 $1.58 $3.0 $1.0 $4.0 $5.0 $1.0 $3.0 $1.0





L LE2 L - LE2 R&D $2,225.00 $75.00 $75.00 $30.00 $2.00 $372.00 $5.00 $1.25 $1.00 $7.25 $0.0 $5.0 $3.0 $0.0 $2.0 $5.0 $5.0



Royalties Paid RoyaltiesReceived Interest Paid Interest

ReceivedServices Fees

PaidServices Fees

Received

Net I/CTransaction

Amount

$1.0 $3.0 $2.0 $2.0 $3.0 $3.0 $2.0

$3.0 $3.0 $4.0 $5.0 $4.0 $3.0 $0.0

$0.0 $5.0 $2.0 $4.0 $2.0 $4.0 $9.0

$5.0 $1.0 $3.0 $1.0 $0.0 $0.0 -$6.0

► Areas where tax authorities may focus further scrutiny

Risk evaluation – potential comparativeratios – Cash tax / income

** Comparative ratioscan be done on anentity-by-entity basis(left) or country-by-country basis (right)

Rank Country Total Tax / Income(EBT)

1 I 23.6%2 D 23.6%3 H 23.6%4 F 19.7%5 C 15.8%6 E 15.8%7 G 15.8%8 A 11.8%9 B 11.8%

10 K 11.5%11 L 9.7%12 J 9.3%

Rank Country +Constituent Entity

Total Tax / Income(EBT)

1 I - LE1 23.6%2 D - LE1 23.6%3 H - LE1 23.6%4 F - LE1 19.7%5 C - LE1 15.8%6 E - LE1 15.8%7 G - LE1 15.8%8 C - LE2 15.8%9 A - LE1 11.8%

10 B - LE1 11.8%11 K - LE2 11.5%12 L - LE2 9.7%13 J - LE2 9.3%


Risk evaluation – potential comparative ratios –EBT / Revenue (margin)


Rank Country EBT / Rev

1 D 30.0%2 E 20.8%3 J 9.8%4 I 8.6%5 M 8.0%6 K 3.6%7 L 3.4%8 H 2.6%9 A 2.5%

10 F 2.3%11 B 2.0%12 G 1.1%

Rank Country + LegalEntity EBT / Rev

1 D - LE1 30.0%2 E - LE1 20.8%3 J - LE2 9.8%4 I - LE1 8.6%5 M - LE1 8.0%6 M - LE2 8.0%7 K - LE2 3.6%8 L - LE2 3.4%9 H - LE1 2.6%

10 A - LE1 2.5%11 F - LE1 2.3%12 B - LE1 2.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

D-L

E1

E-L

E1

J-L

E2

I-LE

1M

-LE

1M

-LE

2K

-LE

2L

-LE

2H

-LE

1A

-LE

1F

-LE1

B-L

E1

G-L

E1C

-LE

1

EBT / Rev

Average

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

D E J I M K L H A F B G C

EBT / Rev

Average


Risk evaluation – potential comparative ratios –EBT per unit employee cost


Rank Country Income (EBT) perEmployee

1 M 17.002 D 16.673 E 10.424 I 5.035 J 4.896 H 3.957 F 3.388 K 2.639 L 2.50

10 B 1.1711 A 1.1612 G 0.4813 C 0.29

Rank Country + LegalEntity

Income (EBT) perEmployee

1 M - LE1 17.002 M - LE2 17.003 D - LE1 16.674 E - LE1 10.425 I - LE1 5.036 J - LE2 4.897 H - LE1 3.958 F - LE1 3.389 K - LE2 2.63

10 L - LE2 2.5011 B - LE1 1.1712 A - LE1 1.1613 G - LE1 0.48

- 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00

D M I J L K E H B F A G C

Income (EBT)per Dollar ofEmployeeExpenseAverage

- 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00

D-L

E1

M-L

E1

M-L

E2

I-LE

1J

-LE

2L

-LE

2K

-LE

2E

-LE

1H

-LE

1B

-LE

1F

-LE1

A-L

E1

G-L

E1C

-LE

1

Income (EBT) perDollar of EmployeeExpenseAverage

Example output

RU

PT

GRSE DE

ESROITCZAUBENO HRFRHU

-100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%

Inco

me

(EB

T)pe

rEm

ploy

ee

Accounting Tax Charge / Income (EBT)

EY refers to the global organization, and/or one or more of the independent member firms of Ernst & Young Global Limited

CBCR case study 1

R&D CentreIndia / UK

India Parent

Principal(Swiss)

Manufacturer(India)

Marketing Co.US / UK /Germany

Cost plusCost plusCost plus

GlobalCustomers

• Legal owner of IP• Takes contract risk• Retains residual

profit

Key features of the structure:► Swiss principal with no/limited substance► Other group companies stated as operating as limited risk bearing

entities with a limited return, generally on a cost-plus basis► Residual profits are retained in the Swiss principal

Impact of CBCR:► Prepare a draft CBCR for this group – Highly likely that the Swiss entity

will stand out, for example as having very high profits per employee► Is there a justification for this ?► What does the group’s master file say ? Do they have one ?

Key messages for the group:► OECD proposes to finalise the CBCR template by September 2014► Many countries could legislate the CBCR requirement right away into

domestic law► This group might need to file its first CBCR template for the year ending

March 31, 2015► Are they ready ?

Contracts

CBCR case study 2

Overseas subsUS/UK/ Europe

India Parent

IndiaSubsidiary

Sub contract @Cost plus (say5%)

Residual ProfitsSub contract @Cost plus (say 5%)

Global Customers

Offshoreexecution

Onshoreexecution

Contract

for services

OverseasbranchesUS/UK/Europe

Key features of the structure:► India retains residual profits► Overseas subs/branches keep small cost plus

Impact of CBCR:► Prepare a draft CBCR for this group – All customers based in

US/Europe but only small profits shown in these countries► Is there a justification for this ? Can the group defend that it has no

PE in these countries ? No contract negotiations happen onshore ?► Master file will need to disclose India APAs which are likely

inconsistent with positions taken overseas ?

Key messages for the group:► Same as previous slide, timescales are short► Are they ready ?

Key questions to consider

► Do you have accurate information on globaloperations? Headcount, revenues, profits bycountry

► Have you identified features listed aspotentially indicative of transfer pricing risk?► Significant transactions with a low tax

jurisdiction► Transfers of IP to related parties► Business restructurings► Specific types of related party payments► Year on year loss making► Poor or non-existent documentation► Excessive debt

► Do you have amounts and supply chain chartsfor material transfer pricing transactions?

► What percent of transactions do you currentlycover in documentation?

► How does your global footprint compare toyour global tax footprint?► Do you have more than 50% of profits

outside jurisdictions where revenue isearned?

► Do you have aligned assets, functions andrisks in your principal company?

► Is IP aligned with business substance?

► Do you earn consistent returns on similartransactions?

► How do the financials you used for a productor business unit analysis compare to theanalyst reports being provided?

► Did you consider the full set of potentiallycomparable agreements in your analysis?


ØKeeping informedq Staying informed about ongoing developmentsq Participating effectively in relevant discussionsq Communicating with management, audit committee, and other stakeholders

ØIdentifying pressure pointsq Identifying the most relevant aspects of the BEPS Action Plan to their businessq Considering potential impact on effective tax rate

ØReviewing current complianceq Proactively managing global controversyq Preparing for increased reporting/ disclosures

ØAssessing and planning for the implications of potential law changesØActively engaging with policymakers

Range of company approaches

Immediate action► Information gathering and initial risk assessment

► Estimate country-by-country template information and assess implications

► Identify entities or countries that appear as outliers or variances

► Consider potential ways to address outliers and variances► Business case support for transactions involved

► Potential for further alignment of business functions

► Prepare audit risk appropriate transfer pricing file

► Determine reason for variances in entity-by-entity or country-by-country analysis

► Identify inconsistencies in the transfer pricing model and develop remedies andimplementation controls

► Explain and document qualitative and quantitative reasons for remaining variances

► Analyze transfer pricing governance and monitoring processes► Frequent retroactive adjustments?

► Controls over change requests regarding intercompany prices?


What’s next for CbC reporting

23 February 2014► Due date for submission of comments to the OECD on the 30 January

Discussion DraftMarch 2014

► Public consultation on Discussion Draft is expectedMay 2014

► OECD Working Party 6 expected to finish work on the templateJune-July 2014

► OECD expected to approve template for releaseSeptember 2014

► OECD expected to release CbC reporting templateImplementation plans are expected in January 2015. Given the political andpublic interest, many countries are expected to implement a CbC templaterequirement, but exact timing and process for such implementation likely will varyand will depend in part on which mechanism for delivery to tax authorities isadvanced by OECD

Action 6 – Prevent Treaty Abuse


Action 6 – Prevent treaty abuse

“Develop model treaty provisions and recommendations regarding the design ofdomestic rules to prevent the granting of treaty benefits in inappropriatecircumstances. Work will also be done to clarify that tax treaties are not intendedto be used to generate double non-taxation and to identify the tax policyconsiderations that, in general, countries should consider before deciding to enterinto a tax treaty with another country. The work will be co-ordinated with the workon hybrids. “

A. Develop model treaty provisions and recommendations regarding thedesign of domestic rules to prevent the granting of treaty benefits ininappropriate circumstances.

B. Clarify that tax treaties are not intended to be used to generatedouble non-taxation

C. Identify the tax policy considerations that, in general, countriesshould consider before deciding to enter into a tax treaty with anothercountry.

Prevent granting of treaty benefits ininappropriate circumstances

A. Cases where a person tries to circumvent limitations provided by the treatyitself.► Historically addressed through requirement to be ‘Resident of a contracting

state’ and ‘Beneficial owner’ – expanded on through OECD work in 1986,1992 and 2003.

► Three-pronged approach suggested:1. Title and preamble to treaties to make intentions clearer2. Specific anti-abuse rule3. General anti-abuse rule

B. Cases where a person tries to circumvent the provisions of domestic tax lawusing treaty benefits

Treaties - Specific anti-abuse rule

Limitation-on-benefits provision:► “Except as otherwise provided in this Article, a resident of a Contracting State

shall not be entitled to the benefits of this Convention otherwise accorded toresidents of a Contracting State unless such resident is a “qualified person”as defined in paragraph 2.”………………………………….………………………………….. (based largely on US style LoB clauses)

“A company’s “primary place of management and control” will be in theContracting State of which it is a resident only if executive officers and seniormanagement employees exercise day-to-day responsibility for more of thestrategic, financial and operational policy decision making for the company(including its direct and indirect subsidiaries) in that Contracting State than in anyother state and the staff of such persons conduct more of the day-to-dayactivities necessary for preparing and making those decisions in that ContractingState than in any other state.”

Treaties - Specific anti-abuse rules

► Splitting of contracts to avoid PE (Action 7)► Hiring-out of labour (adequately addressed in commentary on Art 15)► Avoiding dividend characterisation – Action 2 (Hybrids)► Dividend transfer transactions – minimum holding period proposed► Transactions around immovable property – Amendments proposed to Art 13► Residence tie-breaker – Proposed that tie-breaker of ‘place of effective

management’ be deleted and replaced with competent authority agreement.Rationale - cases of dual residence often involve tax avoidance and are bestdealt with on a case-to-case basis.

► Triangular situations – amendments proposed to model convention to addresssituations where income is transferred to PEs established in a third state withno/low tax.

Treaties - General anti-abuse rule

“Notwithstanding the other provisions of this Convention, a benefit under thisConvention shall not be granted in respect of an item of income if it is reasonableto conclude, having regard to all relevant facts and circumstances, that obtainingthat benefit was one of the main purposes of any arrangement or transaction thatresulted directly or indirectly in that benefit, unless it is established that grantingthat benefit in these circumstances would be in accordance with the object andpurpose of the relevant provisions of this Convention.”

► The above is intended to supplement the specific anti-abuse rule

Treaties - General anti-abuse rule

► “benefit” – tax reduction, exemption, deferral or refund, tax sparing provision► “one of the main purposes” – a transaction can have more than one main

purpose► “arrangement or transaction” – any agreement, understanding, scheme,

transaction or series of transactions. Also includes steps to acquire an entityor to establish tax residence. An example of an “arrangement” would bewhere steps are taken to ensure that meetings of the board of directors of acompany are held in a different country in order to claim that the company haschanged its residence.

► “directly and indirectly” – deliberately broad and intended to look at a series ofsteps/transactions

Domestic law – Avoidance strategies

Avoidance strategies in this category include:

► Thin capitalisation► Dual residence strategies► Transfer mispricing► Arbitrage transactions – characterisation of income, entities or timing

differences► Abuse of ‘relief of double taxation’ mechanisms

Most of the above will be addressed via:► Action 2 (Hybrids)► Action 3 (CFC)► Action 4 (Interest & financial deductions)► Actions 8, 9 & 10 (Transfer pricing)

Domestic law – Avoidance strategies

Domestic tax avoidance still possible where it is argued that:

► Treaties prevent application of domestic GAAR► Treaties prevent application of thin-cap rules► Treaties override CFC rules► Treaties prevent application of exit or departure taxes► Treaties restricting cross-border consolidation► Treaties overriding specific anti-abuse rules in domestic law

The majority of the provisions included in tax treaties are intended to restrict theright of a Contracting State to tax the residents of the other Contracting State.Treaty cannot limit a Contracting State’s right to tax its own residents.

Domestic law – Approach

Reference to US principle of ‘Savings clause’ that confirms the contracting state’sright to tax its residents notwithstanding the provisions of the treaty. Fewexceptions, such as rules on relief from double taxation, which is clearly intendedto apply to residents as well.

Amendments proposed to the commentary on Article 1 to confirm the generalprinciple that the Convention does not restrict a Contracting State’s right to tax itsown residents except where this is intended and treaty should list out theprovisions with respect to which that principle is not applicable.

Avoiding double non-taxation

Changes proposed to title & preamble to treaties and in the introduction to theModel Tax Convention.

“Convention between (State A) and (State B) with respect to taxes on incomeand on capital”

Title: “Convention between (State A) and (State B) for the elimination of doubletaxation with respect to taxes on income and on capital and the prevention of taxevasion and avoidance”

Preamble: ”(State A) and (State B), Desiring to further develop their economicrelationship and to enhance their cooperation in tax matters, intending toconclude a Convention for the elimination of double taxation with respect to taxeson income and on capital without creating opportunities for non-taxation orreduced taxation through tax evasion or avoidance (including through treatyshopping arrangements aimed at obtaining reliefs provided in this Convention forthe indirect benefit of residents of third States)”

Tax policy considerations

Policy considerations relevant when deciding to enter into, modify, replace orterminate a treaty:

► When a state levies no or low tax – What is the actual risk of double taxation? Does this risk justify a tax treaty ? Do elements of the other state’s taxsystem increase the risk of non-taxation ?

► Do high withholding taxes have a detrimental effect on cross-border trade andinvestment ?

► Important to remember other protection offered by treaties vianon-discrimination, certainty of tax treatment and mechanism (via MAPs) toresolve cross-border tax disputes

► Consider willingness and ability of treaty partner to effectively implementmeasures such as administrative assistance, exchange of information andcollection of taxes

One-minute recap

Specific BEPS target areas

OECD’s 19 July 2013 report set forth its work plans in 15 target areas:

1) Tax challenges of the digital economy –Sept 2014

2) Hybrid mismatch arrangements – Sept2014

3) CFC rules – Sept 2015

4) Deductibility of interest and other financialpayments – Sept /Dec 2015

5) Harmful tax practices of countries – Sept2014/Sept 2015/Dec 2015

6) Treaty abuse – Sept 2014

7) Artificial avoidance of permanentestablishment status – Sept 2015

8) Transfer pricing for intangibles – Sept2014/2015

9) Transfer pricing for risks and capital – Sept2015

10) Transfer pricing for other high-risk transactions– Sept 2015

11) Development of data on BEPS and actionsaddressing it – Sept 2015

12) Disclosure of aggressive tax planningarrangements – Sept 2015

13) Transfer pricing documentation – Sept 2014

14) Effectiveness of treaty dispute resolutionmechanisms – Sept 2015

15) Development of a multilateral instrument foramending bilateral tax treaties – Sept 2014/Dec2015


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